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Federal Reserve Bank of San Francisco
FRBSF Economic Letter
Economic Forecasts with the Yield Curve
Michael D. Bauer
Thomas M. Mertens
Abstract

The term spread—the difference between long-term and short-term interest rates—is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special—with low interest rates and risk premiums—the power of the term spread to predict economic slowdowns appears intact.


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Michael D. Bauer & Thomas M. Mertens, "Economic Forecasts with the Yield Curve" , Federal Reserve Bank of San Francisco, FRBSF Economic Letter, number 07, 2018.
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